Bloomberg interviewed SpotGamma Founder Brent Kochuba about a large VIX trade on 11/29.
By Lu Wang
(Bloomberg) — A sizable bet that equity market volatility
would worsen appears to have turned a tidy profit in less than a
day.
About $13 million was spent last night on 65,000 December
call contracts tied to the Cboe Volatility Index, with a strike
price at 26. Similar volume erupted in the series this morning
as the VIX jumped above 27, sending the options to as high as
$3.55 after trading as low as $1.75 in the prior session.
The timing “seemed pretty good,” said Danny Kirsch, head of
options at Cornerstone Macro LLC, adding that transaction was
likely a play on volatility increasing. The investor “made some
money and monetized the trade.”
Stocks have been under pressure since Friday, when fears
surfaced that a new coronavirus variant identified in South
Africa could spark fresh outbreaks and scuttle a fragile
economic recovery.
The S&P 500 retreated Tuesday for a second day in three
after Moderna Inc.’s Chief Executive Officer Stephane Bancel
told the Financial Times that existing vaccines are likely to be
less effective at tackling omicron. Equity losses then deepened
after Federal Reserve Chair Jerome Powell said it’s appropriate
to consider finishing the central bank’s tapering of asset
purchases a few months earlier than previously expected, with
inflation proving more persistent than forecast.
The trader may have gotten out of the position fretting
that Powell would send a dovish signal to spark an equity rally
and a drop in VIX, according to Chris Murphy, co-head of
derivatives strategy at Susquehanna International Group.
“This was a pretty aggressive, good sized VIX trade,” he
said. “It was likely a ‘VIX came in too hard on Monday and I
think it’s gonna bounce’ short-term trade.”
Of course, as with almost everything in the post-pandemic
world, it’s hard to predict central bank policy. And heading
into December, the market faces a couple events that have the
potential to spur turmoil, including a deadline for Congress to
raise the federal debt ceiling by the middle of the month, and
the Dec. 15 Fed policy meeting.
“There are obviously a wealth of issues the market is
digesting, from the debt ceiling and tapering to coronavirus —
and this type of trade would profit if markets react negatively
to any of those items,” said Brent Kochuba, founder of analytic
service SpotGamma. “What’s most interesting is that the trade
was fairly short dated, at a strike near-the-money which
suggests that it’s more of a bet that the VIX will go higher as
opposed to a hedging trade.”
To contact the reporter on this story:
Lu Wang in New York at lwang8@bloomberg.net
To contact the editors responsible for this story:
Jeremy Herron at jherron8@bloomberg.net;
Michael Tsang at mtsang1@bloomberg.net
Jennifer Bissell-Linsk